Effective Credit Management

The effective management of credit involves choosing its best mix and use with respect to loan maturity terms, interest rates, and payment size and frequency. In other words, it shows the insight of knowing when to borrow, how much to borrow, and from where to borrow. As a result, you’re able to meet your required loan obligations without great stress or strain, and you have an overall debt repayment strategy. The ability to handle credit is, of course, influenced by many factors, such as your current and future income, your current and future expenses, the prevailing interest rate that you’ll have to pay on borrowed funds, the payment terms of your loans, and your financial discipline.

Sound credit management can contribute immeasurably to a less stressful, more enjoyable life. It will allow you to spend your money more wisely while keeping your borrowing under control; this, in turn, will help you save on the interest you pay to creditors. It also brings the added bonus of helping you to sleep at night, free of the worry of how you’ll make your next loan payments. Yes, good credit management techniques can even aid your health.

But don’t be fooled: effective credit management is not simply some theoretical jargon that can help you because you hear it once. Just as with virtually anything else in life, if you want to experience any benefits, you’ll need to apply the techniques to your own personal circumstances. This will require a certain amount of sacrifice and discipline. For instance, you may find that you’ll have to reduce, delay, or even eliminate some purchases that you might ordinarily make because of the limits that a credit management program has put on your borrowing. Forgoing, at least in the short term, some desired purchases is the major sacrifice. Fortunately, by following a more disciplined approach to your finances, in the long run you should be able to obtain more of the things that you really want.

The ability to handle debt is primarily a function of the income that is available to make payments to creditors. This is the income that’s left after meeting other basic spending needs, such as food, clothing, shelter, taxes, insurance, and retirement. Although there is likely some flexibility in what you can spend on these items, there’s a definite limit to the amount that you can reduce them. The greater the amount of current and projected income that remains after your required spending needs are met, the larger the debt payments you should be able to afford without becoming financially overextended.

Being able to handle larger debt payments means that, if needed, you can safely borrow more money. Although every individual or family situation is unique, many financial advisors suggest a basic rule-of-thumb to determine your overall debt position. Compute the percentage of your take-home pay, also known as your disposable income, that’s required to service your debts (do not include your home mortgage costs and credit card debt that is regularly paid in full). If the debt payments are 10% or less of your disposable income, your debt is generally within safe limits. If the payments are 11% to 20%, you are at the maximum debt advisable. And if over 20%, you’re probably overextended and should look to reduce your overall debt.

Of course, every situation is different, and spending needs depend on a variety of factors. For example, a family with several children is likely to spend more money than an individual for most basic consumption items. Thus, a single person is generally able to support substantially more debt than a family which earns the same income. The point here is to analyze your own financial circumstances and determine what you need to do to get and keep your credit use, and your finances as a whole, within healthy parameters.

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